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1.Tax on partnerships and LLPs

Partnerships and LLPs are taxed on their income at the rate of 30%. The income of partners distributed after that is tax-free.

Sometimes, partners take salary from the firm, for their services to the firm. They may want to deducting such salary from the income of the partnership. As per Section 40(b) of the Income Tax Act, only salary paid to a working partner is deductible, if certain conditions are met. Such salary must be:

  • authorized by the partnership deed and
  • relate to a period after the date of the partnership deed and
  • must be within the following limits

On the first Rs. 3 lakhs of book profit or in case of loss

Lower of Rs. 1.5 lakhs or at the rate of 90% of the book profit

On the balance book profit

At the rate of 60%


2.Tax on Companies

Indian companies are taxed at 30% plus cess and surcharge. Foreign companies are taxed at 40% plus cess and surcharge. Further, a dividend distribution tax (DDT) of 16.995% (including cess and surcharge) is imposed on dividends actually distributed to shareholders. All dividends distributable by companies from 01 October, 2014 will be taxed at a rate of 19.994 % (including cess and surcharge) on the amount actually distributed as dividend to the shareholders. Alternatively, companies can pay DDT at a rate of 16.995 % on the distributable surplus to be used for distribution of dividend.  Shareholders do not have to pay any further tax on these dividends.

In fact, in certain cases, loans taken by directors of private companies may be treated as dividend under the Income Tax Act (and is called ‘Deemed Dividend’). Although DDT is not payable by the company on Deemed Dividend, directors are required to pay income tax on the Deemed Dividend, to the extent the company possesses accumulated profits.

3.Tax on profits of business and profession

This part will discuss relevant provisions of the Income Tax Act for the purpose of determining income from a business. This is the most important taxing section for any business, including early stage businesses.

As per Section 37 of the Income Tax Act, expenditure that has been wholly and exclusively incurred for the purpose of business can be deducted while computing tax liability. Expenses such as training costs for employees, office electricity charges, costs of goods sold, anti-virus software, preparation of tenders and architects (in a construction business) can be deducted. 
The following are some examples of expenses which cannot be deducted:

  • Personal or living expenses of directors
  • Capital expenditures, that is, expenditures undertaken for acquisition or creation of a capital asset. e.g. expenses on issue of shares, fees paid to Registrar of Companies for increasing the authorized capital of a company. Under certain circumstances, such expenses may be amortisable/depreciable
  • Amount paid for fines, bribery amounts, etc.

As explained before, expenses incurred in the process of creation/ acquisition of capital assets cannot be deducted. Instead, a business is entitled to claim depreciation on the value of certain capital assets - such as building, machinery, furniture, and intellectual property such as know-how, patents, copyrights, trademarks or licences. Depreciation is deducted from the profit of business, and leads to corresponding reduction in tax liability. 
The rates of depreciation on capital assets can be found by looking up appropriate entries for the asset under the Income Tax Rules, as follows:

Appendix 1 of the Income Tax Rules (in case of all businesses except those engaged in generation and distribution of power). Depreciation on such assets is calculated on a fixed percentage of the value remaining each year – that is, 10% depreciation on an asset of INR 100 would lead to a depreciation of INR 10 in the first year, INR 9 in the second year (because the remaining value at the end of the first year was INR 90), INR 8.1 in the third year, and so on.

Examples: Depreciation on motor cars is 15 percent per year, commercial buildings is 10 percent, furniture and fittings is 10 percent and computers and computer software is 60 percent. Depreciation on trademarks, know-how, licenses, franchises, patents or similar rights is 25 percent.

Appendix 1A of the Income Tax Rules (in case of businesses engaged in generation and distribution of power). Depreciation on such assets is calculated at a fixed percentage of the actual price, i.e. 10% depreciation on an asset costing INR 100 will lead to a fixed depreciation of INR 10 each year.

The appendices are accessible here 

4.Treatment of preliminary expenses

It is important for an entrepreneur to understand how preliminary expenses, that is, expenses borne prior to incorporation of a business are treated, and if they can be shown in the accounts of the business subsequently (when it comes into existence). The reason for this is simple – a founder would not want to bear the costs out of his own pocket, and would like to offset them against the revenues of the business. Section 35D of the Income Tax Act allows certain preliminary expenses of a business to be amortized, that is, deducted proportionately from the income, over a period of 10 years. Some of the items on which expenses are permitted to be amortized are preparation of feasibility report or a project report, conducting market surveys necessary for the business, legal charges for drafting memorandum and articles of association. In addition, the government is empowered to notify other items on which such deductions are available.

5.Minimum Alternate Tax (MAT) on Companies and LLPs

As explained in Module II, profit and loss account of a company must be prepared in accordance with the Companies Act, 2013 (as per the format specified in Schedule III of the Act). In the past, several companies have reported book profits to shareholders and investors, but their taxable income under the provisions of the Income Tax Act was shown as nil or an insignificant amount was shown to tax authorities. This was achieved by claiming deductions under several provisions of the Income Tax Act. While they were making profits, they were paying little or no taxes.

The concept of a minimum alternate tax (MAT) was introduced to address this issue.(MAT is not applicable to (Foreign Portfolio Investors) FPI’s,(Foreign Institutional Investors) FII’s and all foreign companies). As per the MAT provision (in 2014), if income-tax computed under the Income Tax Act is less than 18.5 per cent of the book profits of a company (i.e. profit reported as per the Companies Act), then tax shall be payable directly on its book profit, at 18.5%.

The MAT rate is specified each year under the Finance Act. It was initially fixed at 7.5% of book profits, but has gradually been increased to 18.5% (exclusive of cess and surcharge).

Under the Income Tax Act, the tax paid under the MAT regime can be set-off against the liability of subsequent years, through MAT credit allows the tax to carry forward the tax paid as MAT for a period of ten consecutive assessment years from the year in which the MAT was first computed and set-off against the tax liability under the non-MAT provisions of the Income Tax Act.

6.Payment of Income Tax – How to obtain a Permanent Account Number (PAN)

We have briefly summarized the steps for obtaining a PAN number below:

a) A business must submit Form 49A (under the Income Tax Rules) to the National Securities Depository Limited (NSDL) in order to apply for a PAN. The form can be submitted online here. The fee for the form is INR 106 (including service tax). 

b) The applicant receives an acknowledgement number upon submission of the form. This acknowledgment must be printed, signed by the applicant with a photograph, proof of identity and address. The following information should be superscribed on the envelope “APPLICATION FOR PAN – [Acknowledgement Number]”.

c) The envelope must be sent to the NSDL at the following address:
Income Tax PAN Services Unit, National Securities Depository Limited, 3rd floor, Sapphire Chambers, Near Baner Telephone Exchange, Baner, Pune – 411045

For clarification, businesses can call the tax identification network call centre at 02027218080 or e-mail at: tininfo@nsdl.co.in.

7.Date for filing income tax return

Income tax return must be filed in Form ITR-V. As per Section 139 of the Income Tax Act, due date for filing return for partnerships and LLPs (whose accounts require to be audited), companies and working partners (of partnership firms) is 30th September. For salaried persons and proprietors (whose accounts do not require audit), the last date is 31st July. The government may grant extensions for filing returns to a specific category of taxpayers in a particular year.

8.Payment of Advance Tax by Businesses

If aggregate tax liability of an entity is more than INR 10,000, it is required to pay advance tax under the Income Tax Act. As explained before, the deadline of September or July for filing relates to returns for the previous financial year (which ended on 31st March). However, under the Income Tax Act, an entity is required to pay income tax in advance, that is, in the previous financial year itself, as per the following guidelines:

  • If the entity is not a company, i.e. an individual (or his proprietorship business), partnership, or LLP:

Instalment No.

Amount of tax to be paid (as a percentage of total tax liability)

Deadline for payment



15th September



15th December



15th March

  • If the entity is a company:

Instalment No.

Amount of tax to be paid (as a percentage of total tax liability)

Deadline for payment



15th  June



15th  September



15th  December



15th March


9.Capital Gains Tax

Apart from income tax, investors, shareholders and companies are frequently required to pay capital gains tax on various business transactions. For example, acquisition transactions, transactions involving sale of an entire business, exit-related transactions by investors and sale of different of kinds of shares by promoters and shareholders are some examples of transactions on which capital gains tax is usually payable.

Capital gains tax must be paid when a gain has been made on sale of a capital asset – such as shares, a house, etc. Businessmen often make money by transferring assets which have become valuable owing to their efforts – such as intellectual property, an entire business line (including factory, processes, employees etc.) to new buyers. Employees of entrepreneurs can earn capital gains by selling shares purchased after exercising vested options in an ESOP plan. All these transactions attract capital gains tax (tax on the difference between the sale price and the cost at which the asset was acquired). Capital gains tax is imposed on the difference between the amount received from the sale of an asset and the cost at which the asset was acquired (called the cost of acquisition under the Income Tax Act).

Capital gains tax is of two kinds – short term and long-term. Gains from transfer of any asset (e.g. a house, machinery, etc.) held for longer than 36 months qualifies as Long Term Capital Gains (LTCG), and those from an asset held for a shorter period is considered Short Term Capital Gains (STCG). In case of shares of a company, the threshold period is 12 months instead of 36 months. However, unlisted securities of a company will be considered as long term capital assets, only if it is held for more than 36 months. Under income tax law, long-term and short-term capital gains are both taxed differently. Under certain circumstances, long-term capital gains are tax-free, for example, sale of listed shares on the stock exchange after a one-year holding period, and payment of Securities Transaction Tax.

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